The gist is that if you are paying for your son’s or daughter’s college tuition and file for bankruptcy, a recent trend is for the bankruptcy trustee to sue the college for your payment. This falls under the rules that allow trustees to go after transfers from the bankrupt person that were not made in exchange for something of similar value to the bankrupt person, e.g. gifts vs purchases of goods or services. It seems that the purchase of a good or service for someone else (tuition for the student) doesn’t count.
Schools have, in many cases, paid the trustee, and then sent the bill to the student.
I’m assuming this wouldn’t work for payments from UGMA funds. 529 plans look complicated, and I haven’t checked Coverdell accounts.
I can see the logic here. If you can’t pay your debts, I’m not sure how you can pay a big tuition payment. And, conversely, if you can afford to make a tuition payment, you should pay your debts.
The incentives are a little odd in that the school doesn’t have much incentive to fight. Although some have, and have not paid in some cases.
I’m assuming if the bankruptee gifted money to the student, the trustee would have to go after the student. Which might be a blood-from-stone situation. I don’t know what happens then.
Anyway, it’s all a situation I hope to avoid! I just found the article interesting.
So the parents debt is being handed to the student, after the fact? What if anything can the student do to push back to the university rather than be stuck with debt they didn’t agree to? As a student, I might be willing to pay $x for college, but if it costs me $x + $y, I might do something else instead of taking on all that debt; perhaps military + GI Bill???
C’mon, if you’re 18 or 19 & your parents say they can pay for college, do you even know to ask to see their ‘books’ & ‘balance sheet’ or do you believe them?
Not really - the parents paid out money they shouldn’t have to begin with. It’s just as if the parents gave the school a bad check; when the school finds out the check was bad, they’re going to go after the student for the tuition.
No, and 50-something year old me wouldn’t look at their balance sheet if they bought me a car or paid my off my mortgage , either . But I bought the car and took out the mortgage and in most cases, that 18 year old agreed to pay the tuition -and that’s who is legally responsible to pay the car dealer, the mortgage company or the college. The person who made the agreement. Anyone else who pays is making a gift to the person who is obligated. From googling around, it appears that the trustees are not permitted to claw back when the parent is actually obligated by state law to pay the tuition - but there are many , many cases where parents pay tuition without any legal obligation whatsoever and legally, a gift of tuition is not going to be seen as different from any other gift.
So if someone gets divorced and they’re ordered to pay tuition for a child, which drives them into bankruptcy and then the lender goes after the school and they go after the kid and then the court goes back and makes the parent pay? How many cycles can this go through?
That’s insane - how far back are they trying to claw back? Say you’re a college senior and your parents have been giving you money for college the whole time - are you potentially on the hook for a couple hundred thousand if it’s an expensive school and the bankruptcy court thinks your parents shouldn’t have been paying anything the whole time because they had other debt? What if they are declaring bankruptcy because of recent events (medical, job loss) but would otherwise have been solvent?
It appears they can go back as far as the either the time state law allows for setting aside a fraudulent transfer or 2 years, whichever is greater. But the person must have been insolvent at the time the payment was made or the obligation incurred for the clawback to happen - so making the payments and becoming insolvent due to later events won’t result in a clawback.